New Legislation Seeks to Manage Illinois’ Bill Backlog

September 13, 2018

Illinois’ backlog of unpaid bills stood at nearly $7.4 billion as of September 13, down from its peak of nearly $16.8 billion in November 2017. The State’s FY2018 budget stopped the backlog’s growth by ending the two-year budget impasse and authorizing the issuance of $6 billion in bonds to pay off unpaid obligations. The State’s FY2019 budget, however, has a projected (and unlikely) surplus of only $11 million that could be used to reduce unpaid bills.

Although there is no plan to pay down the remainder of the backlog, Governor Bruce Rauner signed three pieces of legislation in late August designed to increase transparency and manage the cost of the backlog.

The two new laws aimed at increasing government transparency were championed by Illinois Comptroller Susana Mendoza. Public Act 100-1064 requires the Governor’s annual budget proposal to show estimated costs for interest penalties on overdue bills, broken down by State agency and fund. In addition, five-year budget forecasts prepared by the Governor’s Office of Management and Budget by November 15 of each year will now have to include projections of total late-payment interest penalties. Prior to the new law, neither the annual budget recommendation nor the forecast explicitly accounted for interest penalties as separately proposed appropriation amounts. According to the Comptroller’s Office, from the start of the budget impasse through March 2018 the State accrued $1.1 billion in interest penalties, and there were $645 million in unpaid penalties as of July 31, 2018.

The second new transparency-related law, Public Act 100-1089, codifies the Vendor Payment Program, which has been run administratively since it was created in 2011 to speed payments to State vendors. Under the program, vendors assign bills to third party lenders, who pay the vendors 90% of the bills up front and the remaining 10% when the bills are paid by the State. In return, the lenders get to keep any interest penalties. The new law requires that operational and ownership information filed by lenders be posted on the websites of the Comptroller and Department of Central Management Services and that the Auditor General do an audit of the program.

A third provision, advocated by State Treasurer Michael Frerichs, allows the State to invest in its own backlogged debt. Public Act 100-1107 amends the Deposit of State Moneys Act to give the Treasurer the authority to invest up to $2 billion in intergovernmental agreements with the Illinois Comptroller, who will use the funds to pay off pending backlogged bills. Money for these investments will come from other State funds that have sufficient liquidity and do not face bill backlogs. The Comptroller will repay the investments with interest at times agreed upon with the Treasurer in the intergovernmental agreements. The agreements would operate alongside, but not eliminate, the existing Vendor Payment Program and would only be available to the Treasurer when the outstanding backlog is greater than $1 billion.

Rather than the 12% interest penalties the State pays on many backlogged bills under the Prompt Payment Act or the 9% the State pays under the Insurance Code, the other funds would receive a variable rate agreed upon by the Comptroller and Treasurer and tied to the LIBOR index.

Although unknown at this point, the agreed upon rate would almost certainly be higher than the 1-2% that the State normally earns on its portfolio, which is invested primarily in conservative securities such as U.S. Treasuries, bonds issued by government-sponsored enterprises such as Fannie Mae and Freddie Mac, short-term loans to large corporations (commercial paper) and money market funds. However, the bill backlog is a considerably riskier investment than those securities, despite the Act’s inclusion of continuing appropriation authority to repay the debt.

The net effect of the purchase will save the State 9%-12% on purchased bills minus the opportunity cost of foregoing 1-2% in traditional investments. The Treasurer estimates that the provision could save the State up to $100 million in interest penalty payments each year.

During this decade of financial difficulties, the State of Illinois’ backlog of unpaid bills has become an important indicator of its fiscal condition, relied on by policymakers, rating agencies, taxpayers and journalists. Now two different ways of measuring the backlog have begun to diverge....

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